Money and Capital as Competing Media of Exchange in a News Economy

Fernando Martin and David Andolfatto ()

Discussion Papers from Department of Economics, Simon Fraser University

Abstract: Conventional theory suggests that fiat money will have value in capitalpoor economies. We demonstrate that fiat money may also have value in capital-rich economies, if the price of capital is excessively volatile. Excess asset-price volatility is generated by news; information that has no social value, but is privately useful in forming forecasts over the short-run return to capital. One advantage of fiat money is that its expected return is not linked directly to news concerning the prospects of an underlying asset. When money and capital compete as media of exchange, excess volatility in the short-term returns of liquid asset portfolios is mitigated and welfare is improved. A legal restriction that prohibits the use of capital as a payment instrument renders the expected return to money perfectly stable and, as a consequence, may generate an additional welfare benefit.

Keywords: fiat money; capital; news shocks (search for similar items in EconPapers)
JEL-codes: E41 E42 E52 (search for similar items in EconPapers)
Pages: 22
Date: 2009-09
New Economics Papers: this item is included in nep-cba, nep-dge, nep-mac and nep-mon
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Citations: View citations in EconPapers (2)

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Working Paper: Money and capital as competing media of exchange in a news economy (2009)
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